Opinion 88-42

This
opinion represents the views of the Office of the State
Comptroller at the time it was rendered. The opinion may no
longer represent those views if, among other things, there have
been subsequent court cases or statutory amendments that bear on
the issues discussed in the opinion.

SALES TAX -- Distribution of (adjustment by county of erroneous
payments to other municipalities)

MUNICIPAL CORPORATIONS -- Setoff (right of county to recoup
erroneous sales tax allocations to other municipalities)

TAX LAW, §1262(c): A town or village which receives a greater
share of county sales tax revenues than that to which it is
entitled is obligated to refund such moneys to the county for
the benefit of the municipality entitled thereto. A county may
recoup an excess payment by instituting legal action or by
exercising its common law right of setoff. 1979 Opns St Comp
No. 79-131 is superseded to the extent it is inconsistent
herewith.

You have requested that we review our 1979 Opns St Comp No.
79-131, unreported, which concerned a situation where a county
distributed sales tax revenues to towns and villages in the
county in a manner which did not comply with the provisions of
Tax Law, §1262. Specifically, in that opinion, we considered a
situation where the county erroneously paid sales tax moneys
which belonged to towns to villages.

In Opn No. 79-131, we expressed the view that one
municipality should not be permitted to receive a windfall at
the expense of another due to a county's erroneous
calculations. We further concluded that the municipalities
which received sales tax revenues in an amount greater than
that to which they were entitled were obligated to refund the
excess amounts for the benefit of the municipalities that
received less than their proper share. To effectuate the
proper distributions, we stated that the municipalities which
received the excess revenues should pay them back to the county
and that the county should then pay them over to the proper
municipalities in the manner prescribed by Tax Law, §1262. We
also concluded, however, that there was no statutory authority
for the municipalities which received the excess moneys to pay
them directly to those municipalities which received less than
their proper share, nor was there statutory authority for the
county to rectify its error by reducing future sales tax
payments to the municipalities which received excess payments.

In Opn No. 79-131, certain municipalities received payments
to which they were not entitled and others received less than
the proper amount of sales tax distribution. Under such
circumstances, it is our opinion that the county may not ignore
its obligation to make the proper distribution of tax revenues
as directed by statute (Tax Law, §1262[c]). Accordingly, we
believe that the county initially should demand repayment of
the improperly paid sales tax revenues and if such demand is
refused, the county then has an obligation to proceed to
collect the moneys improperly paid.

While Opn No. 79-131 correctly observes that nothing in Tax
Law, §1262 provides a mechanism for correcting erroneous
distributions of sales tax, the opinion does not consider the
availability of common law remedies, including the self-help
remedy of setoff. Setoff is a fundamental right, based on the
principle that natural justice and equity require that the
demands of parties mutually indebted be set off against each
other (20 Am Jur2d, Counterclaim, Recoupment and Setoff, §7).
A municipal corporation is entitled to avail itself of the
right of setoff the same as a natural person (see, e.g., Mtr of
Feinberg v Bd of Ed, 74 Misc 2d 371, 344 NYS2d 618, affd 51
AD2d 548, 378 NYS2d 426; 1980 Opns St Comp No. 80-752, p 207;
20 Am Jur2d, Counterclaim, Recoupment and Setoff, §110).

In our opinion, a county which has overpaid sales tax
revenues to a municipality is entitled to collect the
overpayment by withholding a portion of future sales tax
payments pursuant to the common law right of set-off (see
Canale v Department of Taxation and Finance, 64 Misc 2d 786,
378 NYS2d 566; Argiriou & Finkel v Marciante Luncheonette, II,
Inc., 84 Misc 2d 660, 315 NYS2d 448). We believe that, since
the municipality which received the overpayment had no
statutory or other right to the excess moneys paid by the
county, that municipality, in effect, owes a debt to the
county. We also note that, while it would appear that a
creditor may not utilize the self-help remedy of set-off
against a municipality to take a credit against taxes owed to
the municipality or to circumvent the audit and payment
procedures usually applicable to claims against the
municipality (County Law, §369; Village of Charlotte v Keon,
207 NY 364, 100 NE 1116; see generally, 20 Am Jur2d,
Counterclaim, Recoupment and Setoff, §§110, 113), none of these
concerns exist here since the right of set-off is being used by
one municipality against another to effect a distribution
required by statute. Of course, upon withholding the sales tax
overpayments, the county should thereafter forward them to the
municipalities originally entitled to receive the same. As an
alternative to exercising its right of set off, the county may
wish to consider the institution of legal proceedings to
collect the erroneous payments.